A negative watch is a type of monitoring status that is utilized by credit-rating agencies while evaluating the rating that is ultimately applied to a given company. Typically, this type of status is invoked because there are some concerns about the financial status of the business, and the agency feels the need to watch the performance of that business for a period of time before making any changes to the current credit rating. Along with businesses, it is also possible for an entire country to be placed on negative watch status by one or more credit rating agencies.
Being placed under a negative watch is an extremely serious situation. Credit rating agencies like Moody’s, Standard and Poor’s, or Fitch Ratings do not invoke this type of placement unless there is evidence that a company may be taking on debt that is out of proportion with its revenue stream or the value of the company’s assets. Other factors may be involved, such as political issues that could impact the ability of the company to honor its commitments to customers and investors, changes in leadership or ownership that could have a negative impact on the profitability of the business. In any event, placement on a negative watch normally involves citing specific reasons for the action.
While there is a good chance that any business placed on negative watch will eventually receive a lower credit rating, that is not always the case. After monitoring the activities of a company for whatever time period considered prudent by the agency, the results of the evaluation may determine that the business has successfully demonstrated that the current credit rating is equitable, and there is no need to reduce that rating. At the same time, if the concerns of the credit rating agency are ultimately proven realized, the rating will be reduced, an event that most companies attempt to avoid at all costs.
When a negative watch does result in the reduction of a credit rating, the implications for the business involved can be dire. At the very least, the company will find it harder to attract lenders and investors, since the revised rating indicates a greater degree of risk associated with investing in or lending money to that business. Depending on the severity of that credit rating decrease, the company may find itself unable to attract any new investors or to borrow money even at exorbitant interest rates from high-risk lenders.